Magazine

Marine One, Sikorsky Zero

February 13, 2005

A few months ago, George David refused to contemplate a future without a U.S. President flying in a Sikorsky helicopter. United Technologies Corp.'s (UTC) chairman and CEO knew that the unit was facing stiff competition for its bid to build the next-generation Marine One. Still, he jokingly vowed to jump out of a flying helicopter if UTC didn't snag the deal. "It's win or drop dead," David declared.

Oops. On Jan. 28 the U.S. Navy awarded the coveted 9-year, $6.1 billion contract to Lockheed Martin Corp. (LMT) and suppliers led by Anglo-Italian copter maker AgustaWestland Inc. David didn't jump -- and Sikorsky Aircraft Corp. President Stephen Finger said that, while disappointing, the Marine One loss didn't dim the bright future of the S-92 chopper, the design on which the Marine One H-92 bid was based. Even without Marine One, which Sikorsky has made for almost half a century at its Stratford (Conn.) plant, "we are focused on doubling our business by 2008," to $5 billion, said Finger. The S-92 and H-92 have won several competitions against AgustaWestland's EH-101 since being certified two years ago, including selection by the governments of Canada, Turkey, and Turkmenistan.

Even if Sikorsky can double sales, which analysts agree is probably doable, nothing matches the prestige of the Presidential chopper. What's more, the Navy's rejection is just the latest in a series of high-profile blows to Sikorsky and its $37 billion Hartford parent. In the past year, sister unit Pratt & Whitney lost a coveted bid to provide jet engines to Boeing's (BA) 7E7 Dreamliner -- a deal worth as much as $40 billion over 25 years. Rivals General Electric Co. (GE) and Rolls Royce PLC got the nod instead. Add to that the Army's cancellation of the $39 billion Comanche helicopter program.

The net result: Sikorsky's share of the $5 billion global helicopter market fell to 17.1% in 2004 -- well below the 38.9% share it held back in 1990, according to Teal Group Corp. Similarly, Pratt has lost its groove in the large commercial jet engine market, having gone from market dominance 30 years ago to being a marginal player on new orders.

BLACK HAWK UP

Why the string of big losses? The reasons vary from David's refusal to slash prices on the 7E7 jet engine -- a move lauded by shareholders -- to the failure to understand the priorities on the Presidential bid. In the case of Marine One, experts believe Sikorsky underestimated the need for greater size, speed to market, and focus on communications technology in its bid. "The helicopters [themselves] are now a commodity," says Teal Group's Richard L. Aboulafia. While Sikorsky teamed up with L-3 Communications Holdings Inc. (LLL), which handles communications for Air Force One, Lockheed had the edge in systems integration -- the ability to stitch together computers, communications systems and sensors. More important, perhaps, the EH-101 had a longer track record and was ready to go.

As for Pratt, industry observers worry that it lacks the deep pockets and new products to compete on large commercial engine orders. Nevertheless, it is a leader in the military and regional jet market. And with its reported move to buy Boeing's Rocketdyne rocket-engine business for more than $500 million, Pratt aims to bolster its presence there.

Clearly, UTC has some tough decisions ahead. Sikorsky still makes the ubiquitous Black Hawk but may face a tougher battle persuading customers to buy its new S-92 chopper in the face of the Presidential slap. It's considered a top contender for the estimated $8 billion contract to supply 132 search-and-rescue aircraft to the U.S. Air Force. Meanwhile, Pratt may decide to focus its energies increasingly on military contracts and small regional craft.

So there's no need for David to jump out of a chopper. But the Marine One loss should give him plenty to think about.